Apax Partners Completes Takeover of rue21

Private-equity firm Apax Partners said Thursday that it completed its takeover of teen-fashion retailer rue21 Inc., capping a rocky beginning for a deal that has already cost a trio of big banks about $100 million.

Apax agreed in May to buy publicly traded rue21 for $42 a share, or a total of about $1.1 billion. To fund the deal, J.P. Morgan Chase & Co., Bank of America Corp. and Goldman Sachs Group Inc. agreed to provide about $780 million of debt to pair with $283 million in cash U.K.-based Apax put toward the buyout.

Between the time the deal was agreed upon and the debt was pitched to investors, rue21 saw a steep decline in its results, which appeared to scare off would-be investors.

The banks tried unsuccessfully to sell about $530 million of loans in August and launched another push to sell them late last month at a steep discount, the Wall Street Journal reported at the time. The banks eventually sold $538.5 million of loans at 81.5 cents on the dollar, according to people familiar with the matter.

That discount equates to a loss for the banks of about $100 million. Investors who bought the discounted loans have fared better than the banks, as the paper has already traded up to about 85 cents in the secondary market, according to a person familiar with the matter. The remaining debt financing consists of a bridge loan the banks will eventually seek to replace by selling bonds.

It’s unclear exactly how the loss will be divvied up among the banks, though a securities filing says that J.P. Morgan and Bank of America each committed to providing 45% of the deal’s total debt, while Goldman is on the hook for 10%.

It’s unusual these days for a leveraged buyout to find such a chilly reception among credit investors, who’ve flocked to such deals lately, as less risky investments, such as sovereign and investment-grade corporate debt, offer historically low returns

Based in Warrendale, Pa., rue21 has been undergoing a period of rapid expansion, opening about 125 stores in the past year. Those new stores helped net sales rise to $229.3 million during the fiscal quarter ended Aug. 3 from $202 million for the comparable period a year earlier. But income from operations fell to $1.7 million, from $13.7 million, as its costs rose even faster and profit margins shrank.

Same-store sales fell 5.9% in the period, a slide that followed a 4.6% year-on-year decline for the period that ended May 4. And in late September, the company told investors that the “soft sales pattern seen in fiscal August is continuing,” with same-store sales down 9.5% through Sept. 24.